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If the pandemic proved one thing, it’s that our economy is broken. The people who do the jobs we most depend on had already suffered wage stagnation and were now most exposed to Covid on the front lines and to financial hardship in the lockdowns. Politicians everywhere are promising to build back better. So now must surely be the time we try to make our economy work for everyone.
One idea for how to do so is universal basic income, or UBI. It’s sometimes derided as free money, for the idea is that the government should give everyone a regular amount of money, no strings attached, so that they never need to fear for their economic security. During the pandemic the US actually did this and sent several cheques to almost everyone in the country, but cheques in the mail forever may sound ridiculous to you, and the cost of it even more so. Certainly many academics and many of my FT colleagues disapprove of basic income.
We shouldn’t be giving people a handout, because ultimately, that doesn’t help them.
It’s really the universality of it that makes me very sceptical.
But I believe there’s more wisdom to UBI than many people think. Welcome to Free Lunch On Film, the series where I take unorthodox economic ideas that I like, such as universal basic income, and put them to the test.
So UBI is an income, a cash benefit. It’s universal, so it’s given to everyone. And it’s unconditional, which means you don’t need to do anything in particular to become eligible for it. This seems hopelessly radical, even naive. But it’s an idea with an amazing staying power discussed for centuries from the founding fathers of the US to today’s Silicon Valley tech billionaires, from US libertarians like Milton Friedman to Finnish socialists.
I see that the universal basic income would be a natural next step for the Nordic welfare state.
Finland’s government has tested the policy and they’re not alone. India and South Africa have considered it. Iran’s tried a version. There have been UBI trials in the US, Canada, the Netherlands, Kenya, and many more places. But there’s one place that gives a better idea than all of these, and that’s Alaska. When oil tax revenue started coming in 40 years ago the state set up a permanent fund to prevent politicians wasting the money. Every year, it pays out a dividend between one and two thousand dollars to every man, woman, and child living in Alaska.
It was important and it was big for us, especially as a young… as a young family.
Alex and Kira Stuart live in Homer, 220 miles from capital Anchorage. They started out in fishing but now supply wood to restaurants to flavour grills and ovens.
Let me see, oh yeah, deposit SOA, PFD division. Both of them came in.
They saved up the dividends that were paid to their two girls.
We homeschooled both of our children and we used a portion of that savings that the girls had to build their schoolhouse so we could continue to school outside of the kitchen table. And then as the girls got older it was just theirs. If they had a choir trip to go on, they had money.
The Stuarts used their own dividends just as sensibly.
So quite often in the past we would use our dividend cheques or a dividend cheque to buy winter tyres for one of our trucks.
Sometimes if you’re on the margins, that little bit is enough to pay the mortgage or just give you some breathing room. Often, what we did when we had extra, we give to the local non-profits, the local museum, the library.
Even if it’s $1,000 to me, if I go and then spend that $1,000 in Homer, then that person has got their dividend cheque but then they just got another $1,000 from me, and maybe a bunch of other people. So it really ripples out across the whole community.
And they don’t think the cash stops people working.
I just like to think that people like to work. I mean, people like… maybe they would work in a different job. Maybe they would not wash dishes. But if they could have the job they want instead of the job they have to have.
And if they did have a job that they liked, but it wasn’t paying a lot, then they can still keep that job.
But they do think a bigger dividend could change that.
I think there would be definitely a lot more people that would opt to just… if they could just coast on the dividend. If say it was $1,000 a month, and if there was two people, and then they had all their kids.
If there’s one thing the Stuarts made clear, is that the dividend has given them a greater sense of security and well-being.
$1,000 a year is not going to make or break most people. But knowing that we’re getting it is definitely a psychological comfort.
It’s not that much, but it saves your pride a little bit I guess. It feels good to get something and I think everybody can say that.
Alaska is a special case, but what the Stuarts say goes to the heart of the debate on universal basic income, and whether a similar or even larger payment could make sense elsewhere. And I think they answer many of the objections people have to UBI.
What some people think is bad about UBI is precisely what others think is good about it. Above all, that there are no strings attached to receiving basic income. To a conservative thinker like Oren Cass, that is a terrible idea.
The thing about a UBI is that it’s not how parents want to raise their own kids. Most parents don’t tell their kids, don’t worry, whatever you do we’re going to take care of you and give you enough money to live on every year. But they won’t have any say about it, whether they want the kids to receive it or not. In America it’ll be like having your crazy Uncle Sam come charging through the door, telling the kids don’t worry what your parents say, I’m going to take care of you as you turn 18. Work if you want, don’t work, travel and smoke, I’ve got your back.
So why give out money unconditionally? Well, one reason is that the welfare systems we have today are just too complex.
A lot of poor people who are eligible and should be getting the benefits aren’t.
Ioana Marinescu has studied UBI trials as well as the Alaska dividend.
So one thing that a universal benefit would be able to achieve is to avoid leaving behind people who should be eligible, but due to administrative complexities weren’t able to avail themselves of the benefit. Politicians who support UBI, like Finland’s social affairs minister, Hanna Sarkkinen, also believe our welfare systems have to be updated to support more digital and precarious working lives.
People are not so clearly workers, or entrepreneurs, or unemployed, or studying. They might be that all mixed together. And maybe our current social security system is not really flexible enough.
Not everyone on the left agrees with Sarkkinen’s socialist party. UBI is not Finnish government policy. At the same time, not everyone on the right disagrees. It was a previous centre-right government that set up a two-year UBI trial. It paid 2,000 unemployed people 560 euros a month.
The trial showed that people, when they have the universal basic income, they are more satisfied with their life, and they feel that their income is more stable and protected.
The findings also went against the belief that unconditional money weakens the incentive to work.
You see from the Finnish trial that people didn’t work less. So having the universal basic income didn’t mean that people would stop looking for jobs, and stop being active in their life.
That Finnish result has held up elsewhere. People don’t seem to use unconditional money irresponsibly or work less.
In many studies there is no effect on work at all. And in some studies there is some decrease in work but it tends to be very small.
And what matters isn’t just whether a basic income will keep people working, but whether their jobs would be better. This chimes with the experience of the Stuarts in Alaska, who described how their dividend liberates people. And that, to me, is one of the greatest attractions of basic income.
When people don’t live on the edge they enjoy more freedom of choice and suffer less stress, financially and psychologically. They can more easily afford to say no to exploitative jobs or have time off to retrain and learn new skills. They can reduce paid work to care for young children or elderly parents, or even take the risk of starting up for themselves. But not everyone is convinced by small-scale trials.
The experiments that are run are very short and time-limited for a small number of people, so it’s not actually a test of how people would behave in a society where they grow up knowing the programme is there.
And yes, knowing basic income will always be there could make people less keen on paid work.
Because the person has more opportunities to do something outside of work, they might want to work less, especially if the job they are doing isn’t very good.
Being able to leave bad jobs is not a bad thing, though. It could force employers to treat workers better. And remember what the Stuarts said about the Alaska dividend, which has been around for 40 years. When it’s spent, it creates jobs.
All this cash is going to be spent in local businesses, in restaurants, in retail, and that creates jobs. And so you have a phenomenon where maybe people want to work a bit less, but companies want to hire more people. And it turns out that these two effects work in opposite directions, and therefore you could see no effect once you introduce UBI at scale.
That’s why I don’t think we need to worry a lot about the work incentives of a UBI. But sceptics have another worry. They doubt that those who lose their jobs or are poorly paid because of automation and digitalisation can really benefit from a UBI.
Just giving people handouts doesn’t solve the problems that come with being out of work. Particularly the way UBI is being spoken about in Silicon Valley, they’re saying, hey, let’s just go to the Midwest and hand laid off factory workers a cheque and they’re going to be fine. They can go off and be poets and painters. Doesn’t work like that, guys. Work has meaning.
Well, I agree with that. But I still think that if you are out of work, you’re much better off with a UBI than without one. Now opponents still worry that without conditions on the money, some people will just waste it. I think that’s a prejudice not rooted in the facts.
They just spend it on everyday expenses. The rent, the food, just like you would spend any extra income.
Certainly, this is what we see in Alaska, where the cash largely seems to be spent well. Alex and Kira have used it to buy fuel and winter tyres. But critics say the Alaska dividend is too small to draw any conclusions.
The size of the payment is not something that actually is designed to, or could support a family.
That’s a good point. So let’s look at another US case with much more money. In North Carolina, the Eastern Band of Cherokee Indians gets huge revenues from a casino on their reservation, and they hand this out unconditionally to all members of the tribe, just like a UBI. It averages $4,000 to $6,000 a year, much more than Alaska.
The effects were quite remarkable. First of all, increased educational attainment of kids by one full year among the poorest members of the tribe. Secondly, the dividend reduced mental health issues among the kids, and in particular, it reduced drug and alcohol abuse, which I think is very interesting. Because a lot of people when you tell them about UBI, they’re worried that people will spend it on drugs and alcohol. And this study shows that it’s exactly the opposite.
Well, I find all this pretty reassuring. People spend free money sensibly and they don’t stop working, but there is another objection. Why on earth would you want to give it to the rich?
That’s what bothers Melissa Kearney, an economics professor who studies inequality.
The idea that we’re going to be paying transfer payments to a universal set of people, people all up the income distribution, with very little social return for that, that’s what doesn’t make any sense to me. I could come up with a lot better uses of taxpayer dollars, subsidised childcare, low-income rental support, unconditional cash assistance to families with kids.
But supporters have a reason for giving UBI to everyone, including the rich. It’s that if you means test the benefit only for the poorest you penalise people just when they manage to do better.
As they become less poor, their benefits get cut off. And so that both provides a disincentive to work, but also frankly could be seen as unfair. As people are slightly bettering themselves, we are clobbering them. And so the whole point of a universal basic income is that since the cash is the same for everybody, even if you’re working more, you’re still receiving your benefit.
So if we really want to reward work, we should let people keep their cash when they’re successful. Even opponents agree with this point.
You’re right that the case to be made for extending it up the income distribution is then you don’t distort people’s decisions. Whether or not you go to work you get this cheque. That’s a good thing. So it really depends on how much spending we want to put towards this programme.
So here we come to one of the biggest issues. Is UBI even affordable? A small payment like Alaska’s doesn’t make enough of a difference. So I’m interested in whether we could have a generous UBI that would provide a real safety net. But the headline cost seems terrifyingly high.
A meaningful UBI, something like $10,000 per adult in the US, would cost about $2.5tn. That is more, much more, than we spend right now on all redistributive programmes. So if we wanted to pay for something of this magnitude, something that could cost 5 per cent to 10 per cent of GDP, we’d have to give up social security. We’d have to give up disability insurance. To me, that’s a very strange view of what the government should be doing to help its citizens.
Well, I think we can find better ways to fund a UBI if we see it in connection with the tax system, rather than as simply swapping one benefit for another.
Well of course, we cannot look at basic income as a separate conversation. We would make the changes to the taxation system and take the money away from the rich people.
Let’s work through a hypothetical example of a generous basic income. Suppose we wanted to pay all adults one third of what the average British household has to spend per head. That would be about £7,000 a year. I would implement this as a deduction from your monthly taxes, a deduction that could be refunded so that if you didn’t owe any tax, you would get the whole amount paid out in cash.
On a gross basis, that would cost about 18 per cent of national income. But a UBI would allow us to make big savings elsewhere. For example, the basic state pension is about £7,000 a year. If the elderly instead received the same amount as a UBI the government could save 5 per cent of national income. And currently people earn large amounts of money before they start paying tax. And this is worth more to high earners who would otherwise face higher tax rates.
With a UBI paid as a flat tax deduction to everyone we could charge income tax from the first penny earned. In the UK this alone would free up another 8 per cent. So in our example, just those two measures would leave us with a much smaller net funding gap of 5 per cent of national income. That’s still a big amount, to be sure, but as Finland’s Hanna Sarkkinen says, it’s an amount we could realistically consider raising in taxes. What this means is that UBI is not a utopian idea but a serious proposal for social reform that can be seriously debated.
Such a debate will turn not just on the trials and the evidence, but on how you view human nature and the role of government.
Well, in my mind UBI is a bad idea because it says it is the responsibility of the government to support everybody instead of people’s responsibility to support themselves.
We see people as subjects that want to be active, want to work, want to improve their lives. And also, I think we trust people more.
Maybe this is an ideological divide that just can’t be bridged. Even so, I believe there is more agreement than it appears at first.
I think in theory, if you could say actually implementing a universal basic income would not change how people think about work, those would be very good counterarguments to what I’m saying.
And here’s another idea, could we get the critics more on board if we don’t call it a UBI intended to let people choose not to work, but something more like a dividend from shared resources? It could be Alaska’s oil, the Cherokees’ casino profits, big tech data extraction, or a carbon tax.
I like it. And in fact, California is in some ways already doing this. They’re saying, look, we are going to tax data collectors, and then we’re going to hand it back to the individual or via the state to the individual. And I think in the US, given that California tends to lead policy, you may see it taking flight nationally at some point.
And something else everyone agrees to is that we should avoid penalising people for working more or bettering their situation. So people who don’t agree on UBI as a final destination for reform could perhaps agree on some of the specific building blocks that make up UBI.
I see basic income as a road, and I’m not sure whether we will ever get there. But I see that taking steps toward basic income, we can improve and renew our current social security system, and make it more flexible, make it more simple, better for the people.
Universal basic income is still an unorthodox idea, and a lot of people think the proposal just goes too far. But the pandemic has made citizens and politicians more prepared to consider truly radical reform. I believe the time for UBI is drawing near.
And finally, we’d love to hear what you think. So please share your comments.